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Feb 29 2008 10:54AM EST

Municipal Default Alert: Vallejo, California

Do municipal bonds really never default? The Californian town of Vallejo seems to have gotten very close. Portfolio's Liz Gunnison filled me in on the details of the city's bonds, from Bond Buyer:

The city government and its related enterprises had about $201.1 million of outstanding bonds and certificates of participation as of June 30, according to the city's most recent comprehensive annual financial report.

All of this debt carries - for the time being - an investment-grade single-A credit rating. I think recovery rates on municipal bonds are normally in the 60% range, which means that bondholders could be in for $80 million or so in losses, if Vallejo's default isn't averted.

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